Herding behavior refers to the tendency of individuals to conform to the decisions and actions of a larger group, rather than make independent decisions based on their own analysis or intuition. In investing, herding behavior occurs when investors follow the trend or opinions of others, rather than conducting their own research and analysis.
Recent examples of investments that were influenced by herding behavior include:
The dot-com bubble in the late 1990s, where many investors blindly invested in tech stocks without fully understanding the underlying companies and their potential for growth.
The housing bubble in the mid-2000s, where many investors bought into the housing market without fully understanding the underlying economic conditions and the potential for a market correction.
The recent surge in popularity of meme stocks like GameStop and AMC Entertainment, where investors followed each other's actions without fully understanding the underlying companies and their financials.
In each of these cases, herding behavior led to widespread overvaluation of certain assets, which eventually resulted in significant losses for many investors when the bubble burst or the trend reversed.
